Our panel of market professionals discusses seasonality

Let’s Stay and Play

In my book The Little Book That Makes You Rich, I spend several pages discussing the “Sell in May and Go Away” phenomenon that has developed over the years. Adherents of this strategy believe that you should own stock from November to the end of April and then sell out and go to cash.

The funny thing is that is actually worked pretty well over the years, as the strategy mirrors the market’s return but is only invested half the time. This result has a lot to do with corporate and consumer spending habits as well as pension funding timing.

But I am not an advocate of using the approach. I prefer something I call “Don’t Go Away, Let’s Stay and Play.”

This May could well be another bumpy month as post-tax-day pension funding does begin to dry up, removing an important source of buying power from the market. The “sell in May” crowds will be active again this month. But instead of joining the sellers, I want you to look for the opportunity to buy the dip and use weakness to increase your holdings of the very best stocks.

The May swoon is well documented and discussed, but equally strong is substantial evidence that stocks begin to rise as we approach Memorial Day. By the end of the month, market participants will once again begin to focus on fundamentals in anticipation of earnings releases that will begin again in July.

I suggest you use Portfolio Grader to find the very best stocks to accumulate when we get a selloff in May as the seasonal investors flee the market. The rally is beginning to lose breadth as the market moves higher, and the serious money that powers stock price movements is engaging in a flight to quality right now. By focusing on stocks with the very best fundamentals and strong earnings growth, we can be positioned to benefit from their buying when it kicks in near the end of the month.

Stocks that have an “A” grade in Portfolio Grader for both fundamental and quantitative measures will receive an overall “A” grade — these triple-A stocks are what you should be buying when we get market weakness related to seasonal and economic factors over the next month. Rather than following the herd, let’s stay and play to make money off their mistakes with a focus on the very best stocks.